A few more reasons to buy into RESPs
As a child, I recall the annual pre-autumnal ritual of standing in line with my dad, along with hordes of others, eagerly waiting to get into the local office supply store for the back-to-school supplies buying frenzy. For me, the primary goal was being able to convincingly demonstrate my absolute need for the 48-coloured pencil pack, as opposed to the standard 12 or 24 collections.
While parents today may still shudder at the annual cost of school supplies, this pales in comparison to the ever-increasing cost of post-secondary education. Luckily, the opportunity to help our children pay for their upcoming higher education through the use of Registered Educations Savings Plans is more attractive than ever, given recent changes to the RESP rules in the past two years.
Last year's federal budget eliminated the annual RESP contribution limit (previously $4,000 per year, per child) and increased the lifetime RESP contribution limit to $50,000 from $42,000.
The Canada Education Savings Grant (CESG) was also enhanced last year, rising to a maximum annual CESG per beneficiary of $500, based on a $2,500 contribution at 20%. Beneficiaries with unused CESGs from prior years can collect up to $1,000 annually, based on a $5,000 RESP contribution.
This year's federal budget brought about two more positive changes. The first one is the extension of time limits for RESPs.
Contributions to RESPs can now be made for 31 years following the year in which the plan is entered into, up from 21 years. Additionally, the RESP can remain open for 35 years following the year of opening.
These two measures make RESPs far more flexible by allowing students to use the funds for an undergraduate degree or diploma and then, should there be additional funds left over, use those to fund post-graduate work or a professional degree.
The second change announced this year was a relaxing of the rules surrounding payments made to RESP beneficiaries. Called "Educational Assistance Payments" (EAPs) these could only be received from an RESP if, at the time of the payment, the student was "enrolled" in a qualifying post-secondary program.
A concern was that should a student graduate from school in May with extra funds remaining in the plan, there was no legal way for the student to receive an EAP. With the new change, a six-month grace period has been introduced that allows RESP beneficiaries to receive EAPs for up to six months after ceasing to be enrolled in a qualifying program, provided that the payment would have qualified if it had been made immediately before the student's enrolment ceased.
Finally, last week, in its first published "RESP Bulletin," the Canada Revenue Agency's Registered Plans Directorate introduced an "EAP threshold limit" of $20,000, to be indexed annually. The purpose of the limit is to minimize the administrative burden imposed on RESP promoters who often had to request documentation related to an RESP beneficiary's expenses before making an EAP to the student.
Under the new guideline, the CRA no longer expects RESP promoters to assess the reasonableness of each expense and will consider as acceptable all EAP requests below $20,000. The change was effective Aug. 12, 2008.
Note there is still a $5,000 EAP limit during the first semester of enrolment, which can be waived on a case-by-case basis, with government permission.